Helping you with tax relief

To help employees save for retirement, the government usually provides tax relief on the contributions they pay into their pension savings.

How much tax relief will your employees get?

Tax relief on pension saving is available up to a limit known as the annual allowance. The standard annual allowance of how much can be saved into an employee’s pension pot with tax relief is currently £40,000 – but some employees may have a lower annual allowance.

There are two tax relief methods

1. We will automatically set you up using what’s known as the relief at source method

  • With this method you deduct employee contributions from their pay after tax and National Insurance is taken. That’s why we also call this method ‘net’.
  • Then The People’s Pension claims the basic 20% rate of tax back from the government to add to the employee’s pension savings – even for employees who don’t pay tax. Higher or additional rate tax payers need to reclaim any additional tax relief through their self-assessment tax returns.

2. The other option is called the net pay arrangement

  • With this method you deduct employee contributions from their pay before any tax is taken. That’s why we also call this method ‘gross.’
  • But unlike ‘relief at source’, it means lower paid employees who don’t pay tax won’t receive any tax relief.
When you sign up, our system will automatically apply the relief at source method.
Would you like to operate the ‘net pay arrangement’ instead? If so, when you’ve signed up just give us a call on 01293 586666 to set it up.

Not sure which method you’d prefer?

It means all your employees will get the basic 20% rate in tax relief added to their pension savings, even if they don’t actually pay tax (by earning less than the standard personal allowance of £11,500 a year for the 2017/18 tax year). And any higher or additional rate taxpayers can claim the extra tax relief back through their tax returns.

Example – Mike doesn’t earn enough to pay tax. £8 goes from his wages into his pension pot. Then The People’s Pension claims 20% in tax relief, adding an extra £2 to Mike’s pension pot – the same 20% rate as a basic rate taxpayer.

With the net pay arrangement, employee contributions are deducted from their pay before any tax is taken. So basic, higher and additional taxpayers will automatically save 20%, 40% or 45% respectively in tax relief.

Example – John normally pays the basic 20% rate of tax. £50 goes from his wages into his pension savings, before any tax is taken from his pay. This reduces his taxable earnings by £50 so he pays £10 less in income tax. This means he has received £10 tax relief from the government.

However, any employees earning less than the standard personal allowance of £11,500 a year (for the 2017/18 tax year) won’t receive tax relief because they don’t earn enough to pay tax.

What you have to do to get it right

HMRC are becoming more vigilant in monitoring tax relief – in some cases revealing and fining employers who have managed tax relief incorrectly. So it’s important to check you’ve applied the correct tax setting to your employees’ pension contribution deductions.

  • When you sign up with us, we will automatically set you up using the ‘relief at source’ method (we call this ‘net’). Make sure you send us your employees’ pension contributions after deducting tax and National Insurance contributions from their pay.
  • Or are you swapping to the ‘net pay arrangement’ (we call this ‘gross’)? If you’ve contacted us and changed to the ‘net pay arrangement’, make sure you send us your employees’ pension contributions before deducting tax and National Insurance contributions from their pay.

Need to change your tax relief settings?

Get in touch with us at support@bandce.co.uk or by calling 01293 586666.

Page Options: